What to Do If You Think You Might Lose Your Job

If you’ve been watching the recent news roller coaster, you may be worried about your job.

The latest report from the US Bureau of Labor Statistics showed employers pulling back substantially on hiring in July, adding about 35% fewer jobs than projected. The unemployment rate ticked also upward to 4.3%, a level we haven’t seen since October 2021. And while the unemployment rate is still considered low by historical standards, there is plenty of concern about where the economy is headed next.

If you’re alarmed about what all this means for your job and your finances, try not to panic. Follow these steps to prepare for a worst-case scenario, like a job loss or a recession.

Understand your HR benefits 

Whether you’ve recently gotten the difficult news that your position has been eliminated or you’re bracing for a worst-case scenario, understanding the benefits you may be entitled to is essential. Here are a few types of benefits to ask your human resources department about.

Unemployment benefits

If you get laid off – meaning you lose your job through no fault of your own – you’ll typically qualify for unemployment benefits, though the rules vary by state. You’ll usually file for benefits in the state where you worked. 

Contact your state’s unemployment office immediately after you learn that your job has been cut. You can expect to wait about two to three weeks from the time you file until you receive your first unemployment check. 

Severance payment

Some employers offer laid-off workers a severance package as compensation when their position is eliminated. A severance package may include some or all of the following components:

• A lump-sum payment. The amount varies by employer, but a common formula is one or two weeks’ pay for each year of employment. Any payment is taxable as ordinary income.
• Payout for unused paid time off, including vacation and sick time. Some (but not all) states require employers to pay workers for unused PTO if they leave their job for any reason. 
• Extension of employer-sponsored health coverage. Some employers will let you keep your job-based medical, dental and vision coverage for a specified period at no additional cost. 
• Option to keep some company equipment. If you have a company laptop or cellphone, you may be allowed to keep the equipment or buy it at a reduced price.
• Additional benefits. Some companies assist laid-off workers with finding their next job by offering career counseling or resume assistance.

Companies aren’t required to offer severance payments, but when they do, one of the big reasons is to avoid litigation. So if you accept a severance package, you’ll likely be required to sign an agreement stating that you won’t sue your ex-employer.

Health insurance

Even if you’re not offered extended health benefits as part of a severance agreement, you’ll often have the option to extend job-based coverage for you and your dependents. A federal law called the Consolidated Omnibus Budget Reconciliation Act, or COBRA, allows workers who leave their jobs to continue health insurance if their company has 20 or more employees. Depending on circumstances, coverage can usually continue for 18 to 36 months.

The catch is that you’ll usually pay the entire premium, plus a 2% surcharge. Considering that a typical workplace pays more than 80% of the health premium for current employees, COBRA can get expensive when you’ve just lost your job.

Another option is to shop on the Health Insurance Marketplace for a plan. If you lose job-based coverage, you’ll qualify for a special enrollment period under the Affordable Care Act, meaning that you can purchase a plan outside of regular open enrollment. You’ll need to do so within 60 days of losing coverage, though.

Create a bare-bones budget

A bare-bones budget is a no-frills budget that only covers the necessities. You may want to create one so that you have an action plan in case you lose your job. Or if your savings are lacking, you could implement a bare-bones budget now so that you’ll have a safety cushion if your income takes a hit. 

If you’re making a bare-bones budget, the following expenses count as necessities:

• Mortgage or rent payments
• Car payments
• Utilities
• Minimum payments for other loans and credit cards (to avoid damaging your credit score)
• Medical care (including health insurance and medications)
• Groceries
• Pet expenses (including food and veterinary care)
• Car insurance
• Basic internet and cellphone service

The following expenses are generally considered non-necessities and don’t belong in a bare-bones budget:

• Debt payments above the minimum due
• Cable packages
• Streaming services, like Netflix and Hulu
• Gym memberships
• Dining out
• Saving for a vacation

Some categories aren’t so clear-cut, though. For instance, child care may be an essential if you’re still working, but you may be able to cut that from your budget if you lose your job. Contributing at least enough to get your employer’s matching contribution for a retirement account is usually a must. But since accounts like a 401(k) or 403(b) are employer-sponsored, you wouldn’t be contributing to these accounts if you lost your job.

You may also be able to work out a hardship agreement with your creditors if you lose your job. For example, some credit card companies will let you make lower payments or agree to waive late payments and other fees if your income is disrupted. But if you’re still working, this probably won’t be an option.

A budgeting app can help you find expenses you can cut. You could also look for ways to save money on necessities, like shopping at discount grocery stores or asking your utility company about payment assistance programs.

Build your emergency fund

If you’re able to find areas of savings in your budget, make building your emergency fund a top priority. A high-yield savings account is a smart place to stash your emergency fund. Not only can you earn top-dollar on your savings, but you can also access your money without penalty.

Don’t panic and liquidate your retirement accounts

Watching your 401(k) balance tank can be agonizing. But the worst thing you can do is cash out your 401(k) or any other retirement account in a panic. 

Cashing out your 401(k) early is usually a bad move for two reasons:

• You won’t give your money time to recover from a slumping stock market.
• You may owe a 10% early withdrawal penalty if you’re younger than 59 ½, in addition to income taxes.

Ups and downs are a normal part of investing. Predicting the timing of a recovery can be tricky, but staying the course has proven to be the best option for most investors. 

Pay off debts, if you can

If you have any debts that you can pay off now, it could free up room in your budget if you’re temporarily without a paycheck. Two debt payoff methods to consider are the debt snowball and debt avalanche:

• Debt snowball: You’ll make minimum payments on all debts, except for the one with the smallest balance. Put all your extra money toward the smallest debt. Once you’ve paid off that debt, you’ll put your excess funds toward the next-smallest balance.
• Debt avalanche: You’ll make minimum payments on all debts, but you’ll put extra money toward the debt with the highest interest rate. Once you’ve knocked out that debt, you’ll proceed to the debt with the next-highest interest rate.

Perhaps the bigger question is: Should I build savings or pay off debt first? There’s no right answer to that question. One good approach is to split any money you have leftover in your budget between emergency savings and paying off high-interest balances, like credit card debt.

Consider alternative sources for income

If you’re concerned that a job loss is on the horizon, it may be time to look for alternative sources of income. That could mean revamping your resume and LinkedIn profile so that you can apply for other jobs. 

You could also look for other sources of income by taking on a side hustle. Your options here are virtually limitless: You could start a side business, take on freelance work, look for an app-based gig (like driving for Uber, delivering groceries for Instacart or walking dogs on Rover). Or you could start even smaller by selling your old stuff via apps like Poshmark.

Even if you’re not worried about losing your job, it’s wise to review your options for making money on occasion. Finding extra income streams can help you save money and pay off debt faster. And by regularly updating your resume and applying for jobs, you could land a better-paying gig.